U.S. drought could cost insurers over $5 billion

Private crop insurers, a group led by Wells Fargo & Co. and Ace Ltd., may face losses that exceed $5 billion if this year’s U.S. drought is worse than one in 1988, Standard & Poor’s said.

Hot, dry weather across much of the Midwest has damaged crops, led to a rally in corn and soybean futures, and boosted insurance loss estimates. The U.S. subsidizes farmers’ premiums for so-called multiperil coverage, which protects against a loss of revenue or production as a result of drought, hail, wind, frost or other natural causes. Private insurers sell and administer the coverage in the U.S. In return, the federal government backstops the firms with payments and reinsurance.

“Insurers with higher concentrations of premiums in the most-affected states, such as Kansas, Illinois, Kentucky, Indiana, Missouri and Tennessee, will see a larger share of the losses,” S&P analysts led by Jason Porter said Tuesday in a report.

Losses among crop insurers will vary depending on how much government and private reinsurance they use, S&P said. The companies can withstand the losses because of capital levels and revenue from other businesses, according to the ratings firm.

“Underwriting losses will be a drag on earnings, but by themselves, will not affect the capital of most insurers that we rate,” S&P said.

“We do not expect to take any rating actions solely because of crop insurance losses.”

Wells Fargo has reinsurance, in which other companies agreed to absorb losses on policies sold by the firm, said Katie Ellis, a company spokeswoman. She said San Francisco-based Wells Fargo, the fourthlargest U.S. bank by assets, has spread its risks to limit liabilities from a single event.

“It’s a diversified, nationally based business so we’re not concentrated in any one area,” Ellis said.

“It’s really too early to know how this is going to play out.”